• Employer-paid health care: Whose money is it?

    A couple of weeks ago the Kaiser Family Foundation released the results of its annual employer health benefits survey. Aaron summarized it and journalists wrote about it. The main story line was that employers shifted a lot of cost to employees, through higher employee shares of premiums and increased cost sharing. A few comments on this blog and some e-mail I received suggested that at least some folks understand the true story. Employees actually pay for every dollar of premiums, whether it’s listed on their pay stub not. So, the “shifting” of premiums from employer to employee is a fiction. Enter the time machine and go back to a post I wrote in January:

    In a 2006 article in the Journal of Labor Economics titled The Labor Market Effects of Rising Health Insurance Premiums, Katherine Baicker and Amitabh Chandra

    estimate that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4%, and increases the likelihood that a worker is employed only part time by 1.9 percentage points. For workers covered by employer provided health insurance, this increase in premiums results in an offsetting decrease in wages of 2.3%.

    Since health insurance premiums are plausibly a factor of five or so less than wages (annualized), the 10% increase in the former leading to a 2.3% decrease of the latter is close to a one-to-one trade-off. But we don’t have to take just Baicker’s and Chandra’s word for it. Others cite similar findings. In a 2008 article in JAMA (link to a full access, low resolution version) Ezekiel Emanuel (yes that one) and Victor Fuchs write that “the health care cost–wage trade-off is confirmed by many economic studies.” [Reference list omitted; see original post] Clearly the notion that premiums and wages offset one another has an impressive pedigree.

    Hardly anybody gets this. Most people think that the only thing they pay for is their share of the premium and their out-of-pocket costs (deductibles, copays, and the like). Lamentable as factual misunderstandings may be, this is actually a helpful one as far as consumer directed health plans (CDHPs) are concerned. I’ll explain in another post later today.

    • That is precisely the argument I try to explain to people at conferences. Health benefits are a substitute for take-home pay. Workers mostly pay for their own health plan through reduced wages. If workers knew how much they were actually spending on the company health plan, they would demand control of the dollars.

      • @Devon – Thanks for trying to spread the truth! In your third sentence you can drop the “mostly.” Workers pay the full premium. Full stop. (Or were you trying to work in an implicit nuance about the employer-based tax subsidy? If that’s the case, then “mostly” does the trick.)

    • There is one reason employers may bear some cost of premium increases: sticky (nominal) wages. See Sommers (2005) in the International Journal of Health Care Finance and Economics for the full argument.

      One of the observations motivating the analysis is that employee health insurance benefits have been getting less generous, with less employer contribution. Considering the preferred tax treatment of health insurance, this observation is puzzling. Why shift away compensation from insurance to wages when the insurance is tax-free? Sticky nominal wages could explain this.

      • @Aaron – Perhaps I’d have to read Sommers (2005) to fully get what you’re saying, because something doesn’t make sense. These days almost all employee contributions are tax free too, so the shift from employer to employee paid premium has no relevance other than what employees mistakenly think it has.

        Also, one can only lean on favorable tax treatment so much. Why isn’t every dollar of compensation provided as health care? Other consumption is valued too, and to a degree that can change over time and vary across labor markets.

        Thus, examination of just the trend in employer contribution doesn’t really tell us much, if anything, despite the media hype.

    • @Austin

      That is a good point that employee contributions are tax-free too. (I didn’t know that) I suppose my explanation was leaning more heavily on the tax-free nature of employer contributions than it should have. Maybe I misrepresented the paper’s argument in my comment.

      To revise, I think that there are two parts of the observation that are puzzling. 1) Employer contributions are making up a smaller % of total contributions. Why might this be happening? Who knows, but maybe employers actually bear some of the cost of premium increases and want to avoid those rising costs. 2) Benefits have become less generous. Why might this be? Maybe you’re right that workers just want more of other consumption (i.e. more compensation in wages). I think #1 is less easy to explain within the framework that it doesn’t matter who pays for benefits and that it’s all workers. But, you might expect both phenomena if businesses actually had to pay for rising premiums out of profits if nominal wages were sticky.

    • @Aaron-Higher employee premiums provide incentives for selection of cheaper plans. Higher cost sharing reduces utilization. In the long run employer savings from those effects show up as higher wages. Or, perhaps wages had already gone up simultaneously (at some firms) or would have gone down. We don’t know the counterfactual.

      Fundamentally, I have no reason to doubt the studies that show a one-to-one premium-wage tradeoff.